SECAF: Government Contracts Opportunities & Obstacles Grant H. Willis February 11, 2014

1 Government Contracts--Opportunities U.S. -- World’s largest consumer of goods and services In FY 13, $460 billion spent on contracts, $526 billion on grants

2 Government Contracts--Opportunities In FY 12, about $89.9 billion went to small and small disadvantaged businesses SBA goal: 23% of prime contracting to small businesses

3 Government Contracts--Opportunities Estimated Top 20 Contracts in % increase over 2013 ($92 B  $160 B) 73% Defense (mostly Army); 45% IT Cybersecurity, health care needs

4 The Government is a Different Type of Buyer Special government policy concerns drive the buying and contracting processes Unique requirements and contract provisions vary depending upon the source of funds, the procuring agency, the method of procurement, the nature of the goods and services, and the nature of the contractor Risks different than commercial environment. Quite fluid.

5 Unique Requirements and Risks Certifications concerning eligibility and compliance with laws designed to protect the integrity of the procurement process Implied certification of strict compliance with all technical specifications and testing requirements Special accounting, pricing and record-keeping requirements Unique disclosure obligations Increased government focus on audits, compliance and prosecution

6 Key Areas of Risk Socio-economic program requirements Domestic Preference Provisions Buy American/Buy America/ARRA Specialty Metals/Berry Amendment Procurement Integrity Act/Anti-Kickback Act Organizational Conflicts of Interest Pricing Truth In Negotiations Act GSA/MFC Cost Principles & CAS Labor Charging Product Substitution Unique contracting rules (authority/funding/terminations)

7 Consequence of Violations Audits & Investigations Negative Performance Record Disallowance of Costs Civil False Claims Rejection of Invoices Criminal False Statements and Fraud Reductions in Contract Price Substantial Fines, Penalties and Damages Forfeiture of Claims and Contracts Exclusion from Future Contracts

TRUTH IN NEGOTIATIONS ACT (TINA) (FAR Part 15) 8

9 TINA Requirements Statute Imposes a Unilateral, Affirmative Duty to Root Out and Disclose All “Cost Or Pricing Data” Certification that “Cost or Pricing Data” Disclosed Are Current, Accurate and Complete, as of the Date of Price Agreement (“Sweeps”)

10 Applicability of TINA Negotiated Prime Contract > $700,000 Prime Contract Modification > $700,000 Negotiated Subcontract > $700,000 at Any Tier, if Prime Contract and Upper Tier Subcontract(s) Provided Cost or Pricing Data Subcontract Modification > $700,000 at Any Tier, if the Prime Contractor and Upper Tier Subcontractor(s) Provided Cost or Pricing Data

11 Exemptions from TINA Adequate Price Competition Prices Set by Law or Regulation “Commercial Item” Acquisition at Fixed Price Pricing Actions Less Than $700,000 Exceptional Cases - Waiver by Head of Contracting Activity

FALSE CLAIMS ACT ( 31 USC §3729 et. seq.) 12

13 FCA Generally Enacted in 1863; amended in 1986, 2009 and 2010 FCA collections in past 3 years: $8.8 billion (Holder) Applies broadly to cover: –Submitting or causing a false claim to be submitted –Making false statements or using false records to get or keep government money Government’s primary civil anti-fraud mechanism.

14 FALSE CLAIMS ACT Damages and Penalties Penalty of $5,500 to $11,000 per false claim (invoice) Treble actual damages Private plaintiffs may sue in the name of the Government. (Qui Tam “relator”) Liability for “relator” attorneys fees and costs

15 FALSE CLAIMS ACT Case filed under seal while DOJ investigates. DOJ can intervene and prosecute, allow relator to prosecute, or dismiss Relator may be awarded a percentage of the recovery –15%-25% if DOJ intervenes –25%-30% if DOJ declines intervention Usually Results In Debarment Proceedings If Contractor Loses or Settles

FALSE CLAIMS ACT Fraud Enforcement and Recovery Act (May 10, 2009) Patient Protection and Affordable Care Act (Mar. 23, 2010) 16

17 PRESENT RESPONSIBILITY AND SUSPENSION AND DEBARMENT

18 Present Responsibility Contractors Must Qualify as “Presently Responsible” To Do Business With the Government The Test of Responsibility Includes Not Only Adequate Financial Resources and Technical Skills, But Also: –A satisfactory performance record –A satisfactory record of integrity & business ethics –Adequate accounting and operational controls

19 Present Responsibility Responsibility determination made by Contracting Officer prior to each contract award. Global decision that a contractor is not responsible may be made via Suspension and Debarment Process Prime contractors are responsible for ensuring present responsibility of subcontractors

20 Suspension and Debarment An agency may propose to "debar" a contractor from participation in all future government procurements A contractor is "suspended" pending administrative proceedings. Debarment grounds include: commission of a fraud relating to a public contract or subcontract violation of State or Federal antitrust laws commission of specified crimes indicating a lack of integrity, e.g., embezzlement, theft, forgery, bribery, obstruction, false statements, tax evasion mislabeling origin of goods or products ("Made in America") any other offense indicating a lack of honesty or business integrity (FAR 9.406)

21 Suspension and Debarment Contractors also may be debarred for violations of the Davis-Bacon Act, Contract Work Hours and Safety Standards Act, the Service Contract Act, the Fair Labor Standards Act, and related Labor Laws. (FAR ) Corporations are responsible for the actions of officers, directors, managers, employees and agents, and frauds, crimes and serious misconduct may be imputed to joint venture partners (FAR ) Congress has proposed legislation to debar any company convicted of an FCPA violation (HR 5366)

22 Suspension and Debarment Exclusions from all new procurements and “non- procurements” Government-wide. (FAR 9.401) Debarments are for periods of 1 to 3 years (including any suspension period) Contractor proposals must disclose and certify whether they presently are debarred, or have been charged with specified offenses with the past three years. (FAR ) (FAR ) Primes will not use debarred subcontractors absent unique requirements and contracting officer approval

23 Suspension and Debarment – Recent Changes As of December 2008, contractors face suspension or debarment for “knowing” failure by a “principle” to make “timely disclosure” when have “credible evidence” of: –A violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations –A violation of the civil False Claims Act; or –A significant overpayment on a contract. [In connection with one of its government contracts]

24 COMPLIANCE PROGRAMS AND DISCLOSURE REQUIREMENTS

25 Mandatory Code of Conduct and Disclosures for Contractors In December 2008, the FAR Council issued a new rule regarding compliance programs and mandatory disclosure All Covered Contractors “must” have a written Code of Conduct; large businesses must have ongoing compliance programs, training and effective internal control systems Covered Contractors must “fully cooperate” with investigations Covered Contractors must disclose wrongdoing relating to their contracts

26 Mandatory Disclosure A Covered Contractor must “timely disclose” in writing to the agency’s Inspector General and the contracting officer in connection with the award, performance or closeout of the contract, or a subcontract thereunder, “credible evidence” of: –A violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations; or –A violation of the civil False Claims Act Applies to all contracts and subcontracts expected to exceed $5 million with a performance period of at least 120 days (but see new debarment basis)

CURRENT TRENDS & DEVELOPMENTS 27

New Vet and Disability AA Rules New percentage goal-based requirement New reporting requirements New flow down requirements (specific text) 28

Changes in Cost-Type Contracting? Risk shifting Reduced incentive to enter into cost-type contracts? Increased proposed fixed price contracts? 29

Changes in Cost-Type Contracting? LOGCAP III Decisions (KBR) Fed Circuit rejected “best effort” test for allowability; no reliance on “business judgment rule” Costs incurred by gross negligence not allowable Other negligent mistakes? Unclear 30

Bid Protest Activity Slight dip from high in 2012—2,429 new cases More than doubled since 2001 More corrective actions Sustained 17% of protests on merits—most victories because of failure to follow procedures More task order protests 31

Suspension/Debarment Activity on the Rise? 32

Areas of Debarment Risk Small Business Performance Labor Issues Veterans Certifications 33

Suspension/Debarment—Affiliates at Risk Agility / Public Warehouse subsidiaries Suspended for over 4 years 11 th Circuit—can continue past 18 months during criminal proceedings against parent Agencies can suspend based on “adequate evidence”—like “probably cause” Concern that parent will shift business to affiliate 34

Contracting Officer Turnover Contracting officer positions change Uneven training / competence Written notification of changes. Written agreements No apparent authority 35

Cybersecurity Recommendations from final DOD/GSA report Baseline cybersecurity requirements for certain acquisitions (similar to proposed FAR rule) Common definitions Training Overall Cyber Risk Management Strategy OEM / “Trusted Reseller” Purchase Requirements 36

37 PRACTICAL ADVICE

38 Practical Advice Strive for Commercial Item Status Fewer requirements Fewer flow-downs Exemption from TINA and CAS Dramatically reduce compliance risk

39 Practical Advice Commit to Market/Commit to Compliance Must invest in people, systems and procedures to learn and follow rules of road Contract administration; accounting, finance, record- keeping—key functions

40 Practical Advice Compliance Must Be a Core Value Code of Business Ethics and Code of Conduct Internal procedures and controls Independent/anonymous hotline Compliance Officer with access to Sr. Mgmt/audit committee Ongoing training Ongoing internal audit and risk assessment Senior management commitment Part of annual evaluations

41 Practical Advice Manage Records Keep everything you need. Keep only what you need Assume everything you type, text, scribble or send will become public Make it accessible Mergers & Acquisitions Conduct thorough “due diligence” for unique government contract risks Internal evaluations and corrective plans post acquisition

42 Practical Advice When Problems Happen Do triage; get counsel involved in potentially serious matters Do a thorough investigation and make required disclosures ASAP Always keep the debarment issue in mind/prepare both the defense and present responsibility case from the start –Make restitution –Discipline people –Implement reform and safeguards –Try to have it done before the agency asks for it